From the February 01, 2010 issue of Futures Magazine • Subscribe!

Trading binary options: Nadex's guide

Binary options express simple yes/no propositions. If the condition described in the option occurs, then the option settles at 100; and if it doesn’t, then the option settles at 0.

Binary options describe specific events in the financial markets, for example: Gold to be above $950 at 1:30pm today.

• If you thought that: Yes, gold will be above $950 at 1:30 p.m., then you would buy the option.

• If you thought that: No, gold won’t be above $950 at 1:30 p.m., then you would sell the option

They are settled by reference to a specific underlying market.

Expiration

When a contract expires, Nadex calculates an expiration value based on the underlying market prices. The expiration value is then used to settle the contract. If the specified condition has been achieved, then the contract is settled at 100; and if it hasn’t then the contract is settled at 0. Following from the example above:

• If the expiration value for gold was above $950, then the contract would be settled at 100.

• If the expiration value for gold was $950 or less (that is, not above $950), then the contract would settle at 0

Contract size

The contract size for a Nadex binary option is always $100. This means that each one-point movement in the price of the contract is worth a $1 profit/loss per contract.

So if you bought seven contracts, which expired for a 14-point gain, your profit would be 7 x 14 x $1 = $98. Likewise, if you sold 12 contracts and later bought them for a nine-point loss, your result would be a loss of 12 x 9 x $1 = $108.

Source: Nadex

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